HealthSouth reaches $445 million settlement in class-action suits

Thursday, February 23rd 2006, 10:45 am

By: News On 6

BIRMINGHAM, Ala. (AP) _ HealthSouth Corp. said Thursday it had reached a $445 million preliminary agreement to settle federal lawsuits resulting from a massive financial fraud that nearly drove the rehabilitation chain to ruin.

The Birmingham-based company will pay $215 million in common stock and warrants under the global settlement, and insurance companies will pay another $230 million in cash.

Investors involved in class-action suits filed in federal court also will receive 25 percent of anything the company eventually gets in its lawsuit against fired chief executive Richard Scrushy, former auditor Ernst & Young and UBS, HealthSouth's former investment bank.

The company said attorneys were still working on a final version of the agreement, which must be approved by a judge.

HealthSouth did not admit any wrongdoing. Scrushy was acquitted on criminal charges in the fraud.

Current CEO Jay Grinney said the proposed settlement was ``a major milestone in HealthSouth's recovery and a powerful symbol of the progress we have made as a company.''

In a statement, plaintiff's attorney Patrick Coughlin said the price of HealthSouth stock dropped from a high of $31 a share to 9 cents a share once the fraud was revealed.

``We will continue to fight vigorously against HealthSouth auditors and underwriters who were central to HealthSouth's fraudulent behavior,'' said Coughlin, whose firm represents the Illinois-based Central States Southeast and Southwest Area Pension Funds, which benefit Teamsters members.

Other plaintiffs included the Retirement Systems of Alabama, the New Mexico State Investment Council and the Educational Retirement Board of New Mexico.

``As long-term institutional investors, we hope the settlement will serve as a catalyst for HealthSouth's turnaround,'' said New Mexico Attorney General Patricia Madrid.

David Bronner, CEO of Alabama's retirement fund, said the agreement to take $215 million in stock as part of the settlment ``underscores that we believe this very important company is now in the hands of capable management.''

HealthSouth came near bankruptcy after the fraud was revealed in March 2003, but it has since reconstructed years of financial statements and renegotiated lending agreements.

Gregory L. Doody, HealthSouth's general counsel, said the global settlement puts most of the company's legal issues behind it, ``and allows us to move forward.''

In 2004, the company agreed to pay the U.S. government $325 million to settle numerous allegations that it defrauded Medicare and other government health programs.

The company last year agreed to pay $100 million over five years to settle a lawsuit filed by the Securities and Exchange Commission in 2003. That suit alleged alleged an accounting fraud that eventually swelled to about $2.7 billion.

The rehabilitation chain also reached a $25 million settlement in a class-action lawsuit over losses in its employee retirement fund, with insurers paying $18 million of the tab and the company covering the rest.

HealthSouth and Scrushy, its main founder, are still in court fighting over his claims for as much as $100 million in compensation related to his ouster. HealthSouth also has said it would seek tax refunds of as much as $261 million for taxes paid on overstated income during the years of the fraud.

Fifteen former HealthSouth executives pleaded guilty in the fraud, and five finance chiefs who worked under Scrushy testified that he directed the scheme.

A federal jury last year acquitted Scrushy of all charges, with members saying later that the testimony by other company executives wasn't credible.